“Some airlines, if you want six more inches between you and the seat in front, you pay more money but you don’t know it … these are junk fees, they’re unfair and they hit marginalized Americans the hardest, especially … people of color.”
– President Joe Biden, October 26, 2022
Fist Bump Agreements
President Joe Biden has stumbled yet again regarding his handling of the economy.
Back in July, he seemingly forged a behind-the-scenes agreement during his fist bump with Saudi Crown Prince Mohammed bin Salman. This informal deal aimed at ramping up oil production until December, conveniently after the midterm elections. The plan was simple: by tapping into more oil from Saudi Arabia and utilizing the Strategic Petroleum Reserve, which has already decreased by 32% this year, Biden hoped to offer relief at the gasoline pump for American voters.
This strategy was intended to shield the Democratic Party from an electoral disaster during the midterms. However, that high-stakes gamble has backfired spectacularly.
On October 5, the OPEC+ coalition declared a two million barrels-per-day cut in oil production starting November. Shortly thereafter, Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, issued a stark warning:
“It is my profound duty to make clear to the world that losing (releasing) emergency stocks may be painful in the months to come.”
As a result, American taxpayers will now face increased oil prices, whether filling their tanks or replenishing the Strategic Petroleum Reserve. That’s quite the presidential strategy, isn’t it?
Biden joins a long line of leaders who have struggled to manage inflation effectively. Past presidents like Jimmy Carter and George H.W. Bush also faced the wrath of inflation, with Bush blaming monetary policies for his one-term presidency. Now, it seems, it is Biden’s turn to wrestle with these significant economic woes. Below is an overview of how his administration reached this point.
Printing Press Financed Lockdowns
During the 2020-21 COVID-19 pandemic, a surge in money printing captivated economists, yet few warned of the impending consequences. Many academics and government officials pointed to the ‘successes’ of the monetary policies introduced during the 2008-09 financial crisis.
‘Ben Bernanke’ went the refrain from government economists, ‘proved that we could have our cake and eat it too.’
However, the situation was vastly different. Bernanke’s quantitative easing (QE) primarily served as a bailout for banks and the mortgage market. In contrast, the more recent QE under Fed Chair Powell was designed to finance expansive Congressional spending, injecting printed money directly into the consumer economy.
Simultaneously, the lockdowns disrupted supply chains, leading to a significant supply shock. This mismatch between heightened demand from monetary stimulus and diminished supply due to lockdowns created an unsustainable economic environment. What did these central planners expect?
To add to the absurdity, these policymakers believed the economy could simply bounce back to normal with a mere flick of a switch once lockdowns ended. It was a misguided assumption.
While the economy was effectively stalled, it did not cease to evolve. The pandemic exposed significant flaws in globalization—similar to the defeat of the Roman Army by Hannibal in 216 BC.
Deglobalization
Our reliance on fragile trading partners for essential goods—from computer chips and baby formula to prescription drugs and oil—has been revealed as a strategic blunder. This oversight became glaringly evident as corporate leaders focused solely on profits while consumers reveled in the abundance of inexpensive products.
Currently, the decades-long trend of globalization is reversing. One of the inevitable outcomes of deglobalization is a rise in prices for the foreseeable future. Consumers can expect to see declines in the affordability of various goods, and corporate profit margins are likely to narrow.
This fundamental shift illustrates why mere interest rate hikes cannot curtail the rampant consumer price inflation we’re experiencing. It represents a structural change that will take decades to rectify.
The severe impact of excessive money supply on the value of currency unfortunately went unnoticed by policymakers until it was too late. Influential figures like Paul Krugman and Ben Bernanke encouraged such reckless spending.
When inflation began to rear its ugly head, Fed Chair Powell and Treasury Secretary Janet Yellen dismissed it as a transitory issue, advising, “If you just hold your breath for a little longer, it will soon pass.”
This sentiment turned out to be wishful thinking.
As inflation continued to persist, President Biden attempted to redirect blame towards greedy corporations and the oil industry. Yet, his own executive actions restricting oil drilling, such as revoking the Keystone XL pipeline permit, played a crucial role in creating this economic terrain.
In defense of his policies, Biden invoked the concept of “environmental justice,” asserting he was “protecting public health and the environment while restoring science to address the climate crisis.”
The Sordid Politics of Inflation
Eventually, the consequences of rising consumer prices must become severe for central bankers and political leaders to acknowledge that the value of currency has depreciated due to their flawed policies. Still, they often deflect responsibility.
When inflation is finally recognized, the typical response from the central bank is to increase interest rates. However, this puts financial pressure on government expenses, which is often frowned upon by Congress and the president alike.
Ultimately, the decline in the value of money results in a multitude of unpleasant consequences. Paying more for the same goods and services is just the beginning.
This devaluation of currency extends beyond mere purchasing power; it impacts all facets of life. Wage earners, savers, and retirees all suffer as their standard of living diminishes.
Moreover, as interest rates rise and asset prices—such as stocks, bonds, and real estate—fall, many people’s dreams of financial security crumble.
There is a deeper moral issue at play as well; the meanings of fairness and justice are eroded, creating disillusionment among the public who feel cheated by their own government. The anger directed at inflation often centers on a perception of betrayal by those in power.
Simultaneously, business owners and corporate leaders find themselves subject to taxes on windfall profits, theoretically imposed to alleviate the economic suffering inflicted by monetary debasement. These measures only serve to drive prices higher.
A shrewd politician, such as Biden, will shift from assigning blame to fostering division within the populace. He’ll address rising prices by emphasizing their impact on vulnerable groups, claiming they disproportionately harm ‘people of color.’
However, it’s essential to recognize that Biden, like any political leader, is more concerned with maintaining and expanding his power than genuinely assisting those struggling with rising living costs. Government-induced inflation strengthens the grip of bureaucratic control more effectively than any tool available to a politician.
This is the unsavory nature of inflation politics that was conspicuously absent from your civics classes.
In conclusion, the anticipated shift by Powell during the upcoming Federal Open Market Committee (FOMC) meeting is driven not by a genuine decline in inflation rates but rather driven by political motives to stimulate the stock market ahead of election season.
[Editor’s note: This market presents challenges for both savers and investors. Traditional investment strategies may no longer suffice. If you’re interested in exploring alternative strategies to safeguard your wealth and financial privacy, consider reviewing the Financial First Aid Kit.]
Sincerely,
MN Gordon
for Economic Prism
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